The Twilight Zone: Where We Are, RIGHT NOW - Forest & Wood Products Australia

Right now it seems like the calm before the storm. For those old enough to remember the TV show one could say we have entered “the twilight zone”. The good news is as a community we have been able to flatten the curve and significantly reduce the spread of COVID 19. This provides our Federal and State Governments with options on how to proceed with the reopening of the economy. So as the health challenge comes under control the impact on the economy and the shape of the recovery is still to become clear.

In the middle of April the IMF reported that “Australia’s economy will shrink by a massive 6.7% this year”. This was then followed two weeks later with the release of the RBA May statement on monetary policy indicating “the Australian economy is expected to record a contraction in GDP of around 10% over the first half of 2020”. That is a big number with more to come. However, the expectation by both institutions is that growth will strengthen through 2021. A detailed summary of the RBA baseline outlook is as follows:

Forecast Table – May 2020 – ‘Baseline’ Scenario^(a) Percentage change over year to quarter shown^(b)
	Dec 2019	Jun 2020	Dec 2020	Jun 2021	Dec 2021	Jun 2022
Gross domestic product	2.2	−8	−6	7	6	5
Household consumption	1.2	−15	−9	13	9	5
Dwelling investment	−9.7	−17	−13	2	6	10
Business investment	−1.2	−8	−13	−6	4	8
Public demand	4.7	5	2	0	2	3
Gross national expenditure	1.2	−9	−7	7	7	5
Imports	−1.5	−14	−11	13	13	6
Exports	3.4	−10	−7	14	12	4
Real household disposable income	1.8	−8	−8	6	8	6
Terms of trade	−0.6	−4	−7	−9	−2	−2
Major trading partner (export-weighted) GDP	3.2	−6	0	10	5	4
Unemployment rate (quarterly, %)	5.2	10	9	8½	7½	6½
Employment	2.0	−7	−7	4	6	5
Wage price index	2.2	2	1½	1½	1¾	2
Nominal (non-farm) average earnings per hour	3.1	7¾	−¼	−5¾	2½	4
Trimmed mean inflation	1.6	1½	1¼	1¼	1¼	1½
Consumer price index	1.8	−1	¼	2¾	1¼	1½
(a) The cash rate is assumed to remain at its current level, with other elements of the Bank’s monetary stimulus package, including the 0.25 per cent target for the 3-year government bond yield, assumed to remain consistent with current settings. Other technical assumptions include the TWI at 57, A$ at US$0.64 and Brent crude oil price at US$35 per barrel; shaded regions are historical data. (b) Rounding varies: economic activity variables rounded to the nearest whole number; unemployment rate to the nearest half point; wages and prices variables to the nearest quarter point Source: RBA, Statement on Monetary Policy, May 2020

Right now, it is difficult to assess the situation due to the inherent lags in data and the pace and scale of the impact of COVID 19. Consequently, the information available is still not representative of the expected challenges to come. There are many examples of where data still lags current indicators or guidance. For example:

Housing approvals in March were 172,101 annualised up +0.2% on the month before reflecting the formalisation of sales and projects submitted for approval some months ago. While a more immediate indicator the HIA survey of new home sales was down -23.2%.

Another example is CoreLogic’s Home Value Index which indicated housing values were slightly positive nationally at +0.3% for April on low transaction volumes. Contrast this to a UBS report referenced in the AFR 16 April, 2020 which indicated UBS “expect under their full pandemic scenario that house prices will drop 10% over the coming year”.

Inflation was back within the official target range for the first time in several years with the March quarter CPI up +2.2% annualised. However, this was due to supply impacts from the Bushfires and a massive spike in retail sales. Specifically, retail sales were up an unheard of 8.5% in March with hardware, building and garden supplies up +17.4%. This is not expected to continue with the data from AlphaBeta Illion on weekly spending patterns showing that for the last week of April spending was down -20% on normal levels.

Truly reflecting the twilight zone, housing finance data was up +17.5% in March on the equivalent month in 2019. One would normally regard this as a great result. Nevertheless, this needs to be tempered by the RBA forecast indicating dwelling investment will be down -17% in the June quarter.

Another critical factor to keep an eye on is unemployment. In March unemployment increased by 20,300 people to 718,600 or 5.2% of the work force. The expectation is the innovative JobKeeper program will dampen the worst impact by keeping large numbers of employees attached to their employers. Even so, the RBA is forecasting unemployment for the June quarter of 10%.

Collectively these factors will impact the depth of the contraction and the speed of the recovery. So, they are all matters to keep an eye on as we journey across the bridge to the COVID safe economy.